The personal blog of Peter Lee a.k.a. "China Hand"... Life is a comedy to those who think, a tragedy to those who feel, and an open book to those who read. You are welcome to contact China Matters at the address chinamatters --a-- prlee.org or follow me on twitter @chinahand.

Monday, March 12, 2007

China and the Iran Sanctions Follies

Connoisseurs of Oriental guile will find much to appreciate in the current sparring over Iran sanctions—if one enjoys the spectacle of China eating our lunch.

Of course, the United States has been fully engaged in the process. It has responded to Russian and Chinese intransigence on Iran cleverly by alienating the Japanese and the Indians with the insistence they forego Iranian energy projects and compromise their energy security.

Now, taking a whack at the last shaky pillar of the anti-Iranian alliance, the U.S. wants Europe to abandon its significant ongoing export trade with Iran in the area of capital goods and commodities in the service of America’s unilateral crusade to remake the Middle East.

And China is poised to benefit.

Reports on the most recent conference call between “political directors” (the UN ambassadors having been unable to strike a deal, the Security Council + Germany negotiations have been apparently kicked up a level) revealed that a key sticking point has been the US insistence on a “loan guarantee” ban for the next round of sanctions.

This rather mystifying demand is more easily understood if one looks back the previous history of US economic pressure on Iran.

For those of us who have been living on the desert island for the last five years, the Bush administration approach to international initiatives has been 1) to unilaterally set policy 2) institute the policy, either by itself or in cooperation with a “coalition of the willing” and 3) use UN mechanisms to create a binding obligation under international law for footdraggers to follow that policy.

In the case of Iran, the United States has been campaigning to isolate Iran economically by pressuring European banks, by virtue of their US operations, to comply with the U.S. ban on financial transactions with Iran, theory being that the mullahs will be brought to their knees by being cut off from the world financial system.

I accept that Iran is a doddering theocracy with a mismanaged economy, but it’s also an oil exporter with a favorable balance of trade, US$60 billion in forex reserves, powerful foreign friends in Russia and China, and a political opposition that’s been neutered by overt American hostility and the negative example of Iraq.

So contra the free market economists who believe that Iran’s fatal flaw is the absence of a economy that adequately honors and respects free market economists, I don’t think the Iranian government’s going anywhere...even though their money is.

The BBC reported that Iran is pulling its money out of European banks as a precautionary measure against possible sanctions. The money is reportedly going to Asia. I wouldn’t be surprised if it ended up in China.

Anyway, returning to the iron law of unintended consequences, the US has managed to screw up banking relationships between Europe and Iran, to the benefit of certain unnamed Asian banks.

The intended consequence:

Additional risk for European exporters: if they signed a contract with an Iranian firm under letter of credit payment terms, there was the risk that the payment could not be negotiated.

The unintended consequence:

European exporters turn to loan guarantees from their home governments, which insulate an exporter from the political risk of dealing with a dodgy foreign bank by interposing a local bank as the payer and covering that bank’s risk with a loan guarantee in case the payment arrangements with Iran fall apart.

The result:

More friction and overbearing demands from the US (the quotes below are from Steven Weisman’s January 30 2007 article in the New York Times Europe resists U.S. on curbing ties with Iran, hereinafter Weisman):

Typically, American officials say, European companies that do business with Iran get loans from European banks and then get European government guarantees for the loans on the ground that such transactions are risky in nature.

According to a document used in the discussions between Europe and the United States, which cites the International Union of Credit and Investment Insurers, the largest providers of such credits in Europe in 2005 were Italy, at $6.2 billion; Germany, at $5.4 billion; France, at $1.4 billion; and Spain and Austria, at $1 billion each.In addition to buying oil from Iran, European countries export machinery, industrial equipment and commodities, which they say have no military application.(Weisman)

For the United States, the loan guarantees defeat the purpose of the sanctions, which is to strangle all kinds of business activity, legitimate as well as illegitimate, as a means of extra-diplomatic pressure.

So Nicholas Burns went to Europe and tried to get the European Union to impose a ban on loan guarantees for Iranian transaction.

"We are telling the Europeans that they need to go way beyond what they've done to maximize pressure on Iran," said a senior administration official. "The European response on the economic side has been pretty weak."...

American officials say that European governments may have facilitated illicit business and that European governments must do more to stop such transactions. Treasury Secretary Henry M. Paulson Jr. has said the United States has shared with Europeans the names of at least 30 front companies involved in terrorism or weapons programs.

"They've told us they don't have the tools," said a senior American official. "Our answer is: get them." (Weisman)

No can doosky, said the EU.

No legal basis (it bears repeating that Iran is an outlaw state and Axis of Eviliteer only to the U.S.A.; it has diplomatic relations with all the European countries), so there would be a huge rigamarole involved in debating, implementing, and vetting an unprecedented EU initiative.

"We want to squeeze the Iranians," said a European official. "But there are varying degrees of political will in Europe about turning the thumbscrews. It's not straightforward for the European Union to do what the United States wants."

Another European official said: "We are going to be very cautious about what the Treasury Department wants us to do. We can see that banks are slowing their business with Iran. But because there are huge European business interests involved, we have to be very careful."

European officials argue that beyond the political and business interests in Europe are legal problems, because European governments lack the tools used by the Treasury Department under various American statutes to freeze assets or block transactions based on secret intelligence information.

A week ago, on Jan. 22, European foreign ministers met in Brussels and adopted a measure that might lead to laws similar to the economic sanctions, laws and presidential directives used in the United States, various officials say. But it is not clear how far those laws will reach once they are adopted. Weisman

Further armtwisting was applied, and on March 12, Steven Weisman reported in a followup article:

European officials said a resolution embodying the wider ban was negotiated over the last week and should go far toward satisfying the Bush administration, which has been pressing European governments for firmer action against Iranian individuals and companies as part of a campaign to isolate the Tehran government because of its suspected nuclear arms program.

"This is a very positive initiative because it takes the European Union beyond where they were until recently," said R. Nicholas Burns, the under secretary of state for political affairs. "It's not everything we would like to see happen. But the trajectory is good and the momentum is good, so we think this is a positive event."

A text of the resolution, released Monday evening by officials of the European Union, calls for steps to carry out a United Nations Security Council resolution adopted in December. Europeans have been slow to follow through, saying governments do not have the legal tools to act against Iranian companies.

Reading between the lines, you can hear the Europeans sighing, “You don’t go and pursue non-proliferation with the realistic and responsive hyperpower you want; you go with the obtuse and coercive hyperpower you’ve got:

Two European officials said that in some respects the draft complies with American wishes for a broad move against Iran, but in other respects it could fall short. If the European Union adopts the resolution, European governments will have to enact laws individually to carry it out.

"The point is that it takes time for the Europeans to work out exactly where the center of gravity is so they can do something like this," said a European official, asking not to be identified because of the delicate nature of the discussions. "It's not as if the European Union can snap its fingers and get it done right away."

Since the EU has one of the world’s crappiest websites, I was unable to locate a text of the resolution but, rest assured, it does not include an enforceable demand for the cessation of loan guarantees.

OK, now we get the US riposte: put the loan guarantee ban in the UN sanctions resolution, so they can pressure European countries to individually abide by the ban and legislate it, instead of hiding behind the skirts of the EU.

Another proposed provision would would ban new commitments by countries for grants, loans and credits to Iran. Russia and China want this made voluntary.

The two nations also object to a call for international financial institutions to withhold funds from Iran as well as a proposal asking nations to “exercise vigilance and restraint” in providing financial support, including insuring companies trading with Tehran.

I sincerely doubt the Chinese have an export insurance i.e. loan guarantee program worthy of “vigilance and restraint “, so their objection to this language is meant to provide give moral support to the Europeans and conniptions to the United States.

Certainly it is amusing and instructive that the Western news outlets are happy to regurgitate the line that China is responsible for the balkiness on the loan guarantees, when the guarantees are of vital concern only to the Europeans, who are probably desperately grateful for the diplomatic cover from Beijing.

Add the “voluntary” grants, loans, and credits caveat and you have a diplomatic whipsaw that is, to me, brilliant in a Machiavellian sort of way.

European countries either decline to lockstep with the United States on the voluntary trade-related sanctions, in which case the trans-Atlantic united front against Iran is broken...

...or the Europeans withdraw the grants, credits, loans, and guarantees, declaring that Iran business is too risky for their companies, and the Chinese step in and scoop up the contracts.

Bwwwaaaaaaaaaaaahahahaaaaaaaaaaaaa!

They’re probably sitting around the Ministry of Foreign Affairs in Beijing, wiping tears of mirth from their eyes, and saying Can you believe it?

Certainly, China’s Ambassador to the UN Wang Guangya, doesn’t seem to be feeling a lot of pressure. Responding to the news that Iranian President Ahmadinejad plans to come to New York to address the Security Council, Wang said:

“Any member had the right to come to the council...It will be fun if he comes, especially if in connection with adoption of this resolution.”

Fun, indeed, especially since Wang can enjoy a front row seat watching the EU ambassadors squirm in their seats as Ahmadinejad scowls at his erstwhile allies and trading partners.

China and Russia have apparently settled comfortably into the formulation that Iran’s nuclear industry should not benefit from any material or technical support from the outside world, but Iran, as a sovereign state in reasonably good standing, should not be ostracized from the world community and be subjected to broad and coercive economic (or potentially military) sanctions for its controversial uranium program.

China's "main difficulty is with the financial and the trade sanctions against Iran because we feel that we (should) not be punishing the Iranian people," Chinese Ambassador Wang Guangya said after the meeting. "We should punish the Iranians for their activities in the nuclear field." While stressing that Iran must face stiffer sanctions, Russian Ambassador Vitali Churkin said there had been "a lot of attention and discussion to make sure the Iranian people are not punished." Sean McCormack, the State Department spokeman, attempted some divide and conquer of his own, stating as reported by Reuters:

McCormack said Russia was cooperating well — an indication China’s position was more difficult.

(Insert dismissive snort here)

If anything, China and Russia are probably closer to the EU position than we are.

In another sign that the Chinese are toying with us, Wang also generously agreed to expand the Iranian arms export embargo (given the presence of two US carriers and their attack groups in the Persian Gulf, I suppose the US didn’t even think of trying to rally support for an Iranian arms import embargo) beyond missiles and nuclear weapons.

He didn’t agree to an vaguely-worded ban with interdiction procedures that would allow the United States and its allies to conduct a broad campaign of harassment against Iranian financial and shipping assets (the Chinese learned their lesson from the North Korean sanctions, by which John Bolton tried to employ the Proliferation Security Initiative to impose a de facto economic blockade, asserting that everything North Korean, including a shipfull of cement off the coast of Madagascar, was directly or indirectly benefiting its weapons programs).

According to "elements" of the draft, which were obtained by AFP, the text would stipulate that "Iran shall not export any arms or related material (emphasis added) and further decides that all states shall prohibit the procurement of such items from Iran by their nationals, or using their flag vessels or aircraft."

Instead, in a friendly shout-out to his friends in Tehran, Wang proposed an export ban on a few things the Iranians might urgently need at home in the next few months--and which I don’t believe they are in the business of exporting anyway:

It will be interesting to see how far the loan guarantee ban goes, especially since the EU is key if the United States is going to have a majority in the “P5 + Germany” negotiating team, let alone the veneer of a global consensus for confronting Iran over its uranium enrichment program:

The U.S., Britain and France would almost certainly favor tough new sanctions, but know they will have to settle for less to ensure that Russia and China, which have close ties to Iran, won't use their veto power to block a new resolution.

Britain's U.N. Ambassador Emyr Jones Parry said recently that the new resolution would be looking at an "incremental" strengthening of sanctions. The word "incremental" has also been used by other council diplomats.

“Incremental” probably means adding a few more names to the banned companies and individuals list (the mandatory travel ban is apparently RIP as of today), so the UN can save face, point to a specific consequence for Iran’s ignoring the 60-day deadline in the previous resolution, and claim the UN process is still viable:

But not too many names! (note the interesting fact that Chinese Ambassador Wang Guangya seems to be speaking rather confidently on behalf of Russian ambassador Churkin):

But Wang said Russia had raised concerns about specifically mentioning Iran's Revolutionary Guards in the list of entities subject to asset freezes.

The elite military corps, which has more than 200,000 members and its own naval and air forces, oversees vital Iranian interests, including oil and natural gas installations and the nation's missile arsenal. It is independent of the regular armed forces and controlled directly by Iran's supreme leader.

"Russia has difficulties with the name of the Revolutionary Guard because they feel it is an institution in Iran and you don't have to penalize an institution," Wang said.

So far, it looks like the Chinese government is getting everything it wants (i.e. nothing of substance) out of this round of sanctions negotiations.

If the current round of UN negotiations produces only insignificant new sanctions, it will be interesting to see how long the Bush administration sustains its new-found interest in multi-lateral diplomacy vis a vis Iran.

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